BIM56255 - Film and audio products: methods applying to all master versions: excluded expenditure

The rules for allocating expenditure on the production or acquisition of the master version of a film under F2A92/S40B and ITTOIA/S135 do not apply in certain circumstances.

Expenditure deducted under the special rules for qualifying films

Expenditure on the production or acquisition of a qualifying film may not be deducted under F2A92/S40B or ITTOIA/S135 if that expenditure has already been deducted under any of the provisions for qualifying films described at BIM56300 onwards.

If any expenditure is deducted in a relevant period under F2A92/S42 ( BIM56325), including F2A92/S42 as amended by F2A97/S48 ( BIM56380), then no expenditure on that film can be allocated under F2A92/S40B for the same relevant period. The equivalent exclusion in ITTOIA/S135, for IT years of assessment 2005/06 onwards, is slightly wider as no allocation may be made under Section 135 in a relevant period if any expenditure has been allocated under ITTOIA/S137 (preliminary expenditure – BIM56320) as well as under ITTOIA/S138 to S140 (the equivalent provisions to F2A92/S42 and F2A97/S48).

Section 40B and ITTOIA/S135 also do not apply where an election is made under F2A92/S40D or ITTOIA/S143 – see BIM56310.

Films held as trading stock

If the master version of the film is held as trading stock the allocation rules do not apply. In such cases the ordinary principles for valuing and carrying forward stock and work in progress will apply (see BIM33000 onwards). A master version held for the purpose of exploitation by the granting of rights out of it or for the purpose of producing copies for sale will not generally be held as trading stock. It is a fixed asset of the trade or business notwithstanding the statutory requirement to treat expenditure on it as revenue.

On the other hand, where the master version of a film is produced or acquired with the intention of disposing of it after a relatively short period then the master version may well have the character of stock (circulating asset) rather than a fixed asset of the trade. This may be of particular relevance in avoidance schemes seeking to ‘double dip’ the accelerated relief for qualifying films ( BIM56360). Cases should be referred to CT&VAT (Technical) where:

• the master version of a film is disposed of, and
• that disposal follows shortly after the film was produced or acquired, or was pre-ordained, and
• the disposal follows the granting of a lease or license (or similar) with deferred rentals/fees, and
• the seller retains the right to the income arising from the deferred payments, and
• it is argued that the film is a fixed asset and not stock in trade.

Reproductions

The provisions do not cover expenditure on the purchase of reproductions as this would not amount to an acquisition of the master version.